The Fifth Circuit just unbridled the American Quarter Horse Association (AQHA) from an antitrust trial loss about its ban of cloned horses.Abraham & Veneklasen Joint Venture v. American Quarter Horse Assoc., No. 13-11043 (5th Cir., slip op. Jan. 14, 2015.)  Quite apart from fascinating bioethics and technology issues, the case highlights antitrust risks — particularly for mixed-purpose associations.

Cloning – It’s Not Just For Science Class.

The focus of the AQHA case is the breed association registration rules – in essence, what defines a Quarter Horse – and how they are implemented.  Registration of a horse is fundamental and required for participation in many racing, showing, and breeding activities.  The AQHA, through a several-year process, implemented a rule prohibiting the registration of cloned horses (produced from one horse without two genetic parents).  The plaintiffs invested in cloned horses, but could not register them because of the AQHA rule.  They sued, alleging the rule was implemented through a conspiracy of powerful committee members to eliminate competition to themselves from cloned horses.  AQHA contended that its cloning ban was implemented for a number of reasons – including moral and practical ones – through an appropriate process.

The trial was hotly contested.  The plaintiffs won liability findings from the jury, but no damages.  The trial court entered a broad injunction requiring AQHA to adopt rule changes permitting cloned horses.  The Fifth Circuit reversed and rendered judgment in favor of AQHA, finding no evidence to support the conspiracy verdict.1

Can An Association Conspire With Its Own Committees Or Members?  Maybe.

The Fifth Circuit faced unclear legal issues about whether a breed organization can unlawfully conspire with its own committees or members in making a rule.  The court noted that past cases all rejected conspiracy claims against animal breed registries.  But, that was not dispositive due to the Supreme Court’s American Needle2  case, which found there can be a conspiracy between a league and its competitor members who have separate and independent economic interests. 

The Fifth Circuit found too many “troubling” distinctions between the AQHA and American Needle cases affect the legal conspiracy issue.  In American Needle, all the separate league members had to agree on the challenged licensing arrangement and economically profited from the joint conduct.  Other associations, as shown by AQHA, do not cleanly fit within the Supreme Court’s analysis.  “AQHA is more than a sports league, it is not a trade association …”   AQHA has interests not limited to profit or membership numbers.  Instead, the association sets breed standards — “creating” the product – and is devoted to preserving the breed and sanctioning events.  If purely profit-driven, the AQHA might financially benefit from including clones and generating increased membership and fee revenues.

The Fifth Circuit found it unclear whether American Needle covers all organizations with members who have separate economic interests.  It opined that legal structure of the association — an issue not explored by the Supreme Court — should matter to the functional analysis of whether an association can conspire with its members.  In this, the AQHA’s structure gave the court pause.  AQHA has a diverse membership — any of whom can propose rules — and is governed by a large rotating board and committee structure that went through numerous changes and activity in adopting the challenged rule. 

In the end, the Fifth Circuit teed up unresolved legal questions, but declined to rule on whether the AQHA was legally capable of conspiring with its committee members.  Instead, the court assumed that the answer is yes, and examined the trial evidence. 

Did AQHA Conspire With Its Committee?  Not Here, Where Plaintiffs Could Not Overcome The Association’s Structure And Process.

Did AQHA committee members, acting to advance their own economic interests, control decision-making and conspire with AQHA to exclude cloned horses?  The Fifth Circuit said no.  There was no direct evidence of a conspiracy.  So, the plaintiffs needed evidence to both support an inference of conspiracy and to exclude the possibility of independent conduct.  

Three types of evidence that often find their way into conspiracy cases were insufficient in the AQHA case: (1) the alleged conspirators stood to financially gain; (2) disproportionate influence by alleged conspirators; and (3) communications and messaging.  For each, the Fifth Circuit saw only speculation, innuendo, or hollow labels.

On financial motive, there was evidence about only a handful of committee members having an alleged profit motive to exclude clones.  In the court’s view, “more than the existence of the financial interests of a few” was necessary to the separate economic interests test.  AQHA’s structure and process also meant that plaintiffs did not exclude the possibility of independent conduct because committees rotated their membership each year.  No evidence showed improper or disproportionate process or voting strength by the alleged conspirator committee members despite the plaintiffs’ labels of “sham procedures” and stacked decks.”  Finally, “one-sided complaints” in the form of impassioned speeches by committee members against cloning (“I will not allow” cloning technology and “I will take every dime” invested out of the industry if it moves forward) were insufficient to show conspiracy.

The Fifth Circuit confirmed that “antitrust law are not intended as a device to review the details of parliamentary procedure.” Despite legal uncertainty about intra-association conspiracy claims, the AQHA case shows that careful structuring of committees, thoughtful rule making processes, and care in messaging can mitigate antitrust risk.